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Reasons to consider corporate bonds

Find corporate bonds

The range of corporate bonds issued each year allows investors to tailor a bond portfolio around their specific needs. The various types of corporate bonds offer different risk levels, as well as varying yields and payment schedules.

Fixed-rate coupons
The most common form of corporate bond is one that has a stated coupon that remains fixed throughout the bond’s life. It represents the annual interest rate, usually paid in two installments every six months, although some bonds pay annually, quarterly, or monthly. The payment amount is calculated as a percentage of the par value, regardless of the purchase price or current market value. With corporate bonds, one bond represents $1,000 par value, so a 5% fixed-rate coupon will pay $50 per bond annually ($1,000 × 5%). The payment cycle is not necessarily aligned to the calendar year; it begins on the "Dated Date," which is either on or soon after the bond’s issue date, and ends on the bond’s maturity date, when the final coupon and return of principal payment are paid.

Investment grade vs. non-investment grade (high yield)
Corporate bonds are generally rated by one or more of the three primary ratings agencies: Standard & Poor’s, Moody’s, and Fitch. These firms base their ratings on the bond issuer’s financial health and likely ability to make interest payments and return the bondholders’ principal. Rated bonds fall into one of two categories: investment grade or non-investment grade (also known as high yield). Investment grade bonds are considered to be lower risk and, therefore, generally pay lower interest rates than non-investment grade bonds, though some are more highly rated than others within the category. Non-investment grade bonds are considered to be higher risk or speculative investments. The higher yield reflects an increased risk of default. A company’s financial health can change, and when it does, its bonds’ ratings may change as well. So an investment grade bond could become non-investment grade over time and vice versa.

Zero-coupon
Zero-coupon corporate bonds are issued at a discount from face value (par), with the full value, including imputed interest, paid at maturity. Interest is taxable, even though no actual payments are made. Prices of zero-coupon bonds tend to be more volatile than bonds that make regular interest payments.

Floating-rate*
The coupon on a floating-rate corporate bond changes in relationship to a predetermined benchmark, such as the spread above the yield on a six-month Treasury or the price of a commodity. This reset can occur multiple times per year. The coupon and benchmark can also have an inverse relationship.

Variable- and adjustable-rate*
Variable- and adjustable-rate corporate bonds are similar to floating-rate bonds, except that coupons are tied to a long-term interest rate benchmark and are typically only reset annually.

Callable and puttable
The issuer of a callable corporate bond maintains the right to redeem the security on a set date prior to maturity and pay back the bond’s owner either par (full) value or a percentage of par value. The call schedule lists the precise call dates of when an issuer may choose to pay back the bonds and the price at which they will do so. The callable price is generally expressed as a percent of par value, but other all-price quotation methods exist.

With a puttable security, or put option, the investor has the right to put the security back to the issuer, again at a set date or a trigger event prior to maturity. A common example is the “survivor’s option,” whereby if the owner of the bond dies, the heirs have the ability to put back the bond to the issuer and typically receive par value in return.

Step-up*
Step-up corporate bonds pay a fixed rate of interest until the call date, at which time the coupon increases if the bond is not called.

Step-down*
Interest on step-down securities is paid at a fixed rate until the call date, at which time the coupon decreases if the bond is not called.

Convertible Bonds*
Convertible bonds can be exchanged for a specified amount of the common stock of the issuing company, although provisions generally restrict when a conversion can take place. While these bonds offer the potential for appreciation of the underlying security, prices may be susceptible to stock market fluctuations.

* These types of corporate bonds are not available to purchase through Fidelity.

Choice
The range of corporate bonds issued each year allows investors to tailor a bond portfolio around specific needs. Investors should, however, consider that each issuer has its own unique risk profile.

Secondary market
An active secondary market exists for many corporate bonds, which creates liquidity for investors. Investors need to remember that some issues can be thinly traded, which may impact pricing and may pose a challenge when selling.

New issues
Customers are able to access new issue corporate bonds through the CorporateNotes ProgramSM. Each week a limited number of new issue corporate bonds are available for purchase at par, in minimum denominations of $1,000, without additional trading concessions.

Ratings
Most corporate bonds are rated by at least one of the major rating agencies. Fidelity offers both investment grade and non-investment grade bonds, which are classified according to their rating. When considering an investment in corporate bonds, remember that higher potential returns are typically associated with greater risk.

Yields
Corporate bonds are among the highest yielding fixed income securities. In fact, the yield differential over Treasuries may be great enough to outpace inflation over the long term. Because interest is fully taxable, buyers should evaluate their tax situations before investing.

When investing in corporate bonds, investors should remember that multiple risk factors can impact short- and long-term returns. Understanding these risks is an important first step towards managing them.

Credit and default risk
Corporate bonds are subject to credit risk. It’s important to pay attention to changes in the credit quality of the issuer, as less creditworthy issuers may be more likely to default on interest payments or principal repayment. If a bond issuer fails to make either a coupon or principal payment when they are due, or fails to meet some other provision of the bond indenture, it is said to be in default. One way to manage this risk is to diversify across different issuers and industry sectors.

Market risk
Price volatility of corporate bonds increases with the length of the maturity and decreases as the size of the coupon increases. Changes in credit rating can also affect prices. If one of the major rating services lowers its credit rating for a particular issue, the price of that security usually declines.

Event risk
A bond’s payments are dependent on the issuer’s ability to generate cash flow. Unforeseen events could impact their ability to meet those commitments.

Call risk
Many corporate bonds may have call provisions, which means they can be redeemed or paid off at the issuer’s discretion prior to maturity. Typically an issuer will call a bond when interest rates fall, potentially leaving investors with a capital loss or loss in income and less favorable reinvestment options. Prior to purchasing a corporate bond, determine whether call provisions exist.

Make-whole calls
Some bonds give the issuer the right to call a bond, but stipulate that redemptions occur at par plus a premium. This feature is referred to as a make-whole call. The amount of the premium is determined by the yield of a comparable mature Treasury security, plus additional basis points. Because the cost to the issuer can often be significant, make-whole calls are rarely invoked.

Sector risk
Corporate bond issuers fall into four main sectors: industrial, financial, utilities, and transportation. Bonds in these economic sectors can be affected by a range of factors, including corporate events, consumer demand, changes in the economic cycle, changes in regulation, interest rate and commodity volatility, changes in overseas economic conditions, and currency fluctuations. Understanding the degree to which each sector can be influenced by these factors is the first step toward building a diversified bond portfolio.

Interest rate risk
If interest rates rise, the price of existing bonds usually declines. That’s because new bonds are likely to be issued with higher yields as interest rates increase, making the old or outstanding bonds less attractive. If interest rates decline, however, bond prices usually increase, which means an investor can sometimes sell a bond for more than face value, since other investors are willing to pay a premium for a bond with a higher interest payment. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you’re holding a bond until maturity, interest rate risk is not a concern.

Inflation risk
Like all bonds, corporate bonds are subject to inflation risk. Inflation may diminish the purchasing power of a bond’s interest and principal.

Foreign risk
In addition to the risks mentioned above, there are additional considerations for bonds issued by foreign governments and corporations. These bonds can experience greater volatility, due to increased political, regulatory, market, or economic risks. These risks are usually more pronounced in emerging markets, which may be subject to greater social, economic, regulatory, and political uncertainties.

Next steps

Find corporate bonds. Choose from 40,000 new issue and secondary market bonds & CDs, and approximately 60,000 total offerings with our Depth of Book.

From our experts

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

credit risk

debt obligation/principal

an interest-bearing promise, to pay a specified sum of money (the principal amount) on a specific date; bonds are a form of debt obligation; categories of bonds are: corporate, municipal, treasury, agency/GSE

face value

fixed income

a type of asset class in which the investments provide a return in two possible forms; coupon paying bonds have fixed periodic payments and a return of principal; zero coupon bonds are sold at a discount, do not pay a coupon, and have a return of principal plus all accumulated interest at maturity

interest rate

issuer

a government, corporation, municipality, or agency that has issued a security (e.g., a bond) in order to raise capital or to repay other debt; the issuer goes to an underwriter to get their securities sold in the new issue market; for certificates of deposit (CDs), this is the bank that has issued the CD; in the case of fixed income securities, the issuer of the security is the primary determinant of the security's characteristics (e.g., coupon interest rate, maturity, call features, etc.)

maturity, maturity date(s)

the date on which the principal amount of a fixed income security is scheduled to become due and payable, typically along with any final coupon payment. It is also a list of the maturity dates on which individual bonds issued as part of a new issue municipal bond offering will mature

premium

principal repayment

the payment of the face value of a bond or CD by the issuer, this can be due to the securities reaching maturity date, or because the issuer redeemed the securities prior to maturity due to a call or other form or redemption

Standard & Poor's (S&P) Corporation

Treasuries

debt obligations of the U.S. government that are issued at various intervals and with various maturities; revenue from these bonds is used to raise capital and/or refund outstanding debt; since Treasury securities are backed by the full faith and credit of the U.S. government, they are generally considered to be free from credit risk and thus typically carry lower yields than other securities; the interest paid by Treasuries is exempt from state and local tax, but is subject to federal taxes and may be subject to the federal Alternative Minimum Tax (AMT); U.S. Treasury securities include Treasury bills, Treasury notes, Treasury bonds, zero-coupon bonds, Treasury Inflation Protected Securities (TIPS), and Treasury Auctions

yield

the percentage of return an investor receives based on the amount invested or on the current market value of holdings; it is expressed as an annual percentage rate; yield stated is the yield to worst — the yield if the worst possible bond repayment takes place, reflecting the lower of the yield to maturity or the yield to call based on the previous close

zero-coupon bond

a bond where no periodic interest payments are made; the investor purchases the bond at a discounted price and receives one payment at maturity that usually includes interest; they have higher price volatility than coupon bonds as a result of interest rate changes